During the COVID-19 pandemic, the Employee Retention Credit (ERC) was seen as financial lifeline for many businesses who were faced with government-mandated shutdowns and significant revenue losses. However, clouded by the prospect of lucrative government benefits and a confusing set of requirements, many employers filed inaccurate, maybe even false claims – often as a result of aggressive marketing tactics. In order to provide a safe harbor to those entities that may have filed such false or inaccurate claims, the IRS has established a new withdrawal process. This measure is designed to aid businesses in re-evaluating the accuracy of their ERC claims and wish to avoid the penalties and other complications of incorrect filings.
Background on the ERC and Emerging Problems
The ERC is a refundable tax credit intended for businesses that kept employees on their payroll while facing economic hardships caused by the pandemic. However, not long after its introduction, issues surfaced. Some businesses, influenced by the aggressive marketing of ERC promoters, have filed claims without fully meeting the eligibility criteria, leading to a slew of inaccurate claims. Even in the months and years since the effects of the pandemic have subsided, these promoters continue with their aggressive marketing on TV, radio, spam emails and robocalls.
The IRS reports approximately 3.6 million claims have been made, and the process has been marred by concerns over compliance. Earlier this year the IRS included the ERC on it “Dirty Dozen” list – a list of the worst tax scams for businesses and individuals to be aware of. The IRS has become increasingly concerned by the growing number of illegitimate claims and messaging pushed by some promoters claiming, “anyone can qualify.” Consequently, in September 2023, the IRS imposed a moratorium on processing new ERC claims, and has initiated an intense audit process, with hundreds of criminal investigations targeting dubious filings and deceptive promoters. As a safeguard, a withdrawal process has been introduced, allowing employers to retract improperly filed claims before they lead to unwanted IRS scrutiny.
Understanding the Withdrawal Process
The withdrawal option provides a potential escape hatch for those who suspect their claim may not withstand IRS review. If you’re concerned about the accuracy of your ERC claim, here’s what you need to know about withdrawing it:
- Who Can Withdraw a Claim?
The ERC claim withdrawal instructions are available here. In general, you can use the withdrawal process if you:
- Filed an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X) solely to claim the ERC.
- Have not received an ERCrefund check
- Have not received a refund check but have been notified that you are under audit.
- Received a refund check but have not cashed or deposited it.
- Wish to withdraw the entire ERC claim.
- How to Withdraw a Claim
The IRS has established the steps necessary to withdraw a claim. Again, it’s important to carefully follow IRS instructions, which are summarized below:
- Your Payroll Company Filed the Claim: If a payroll company filed your claim, consult them first. They might need to handle the withdrawal for you.
- You Filed the Claim Yourself: If you filed the claim yourself and haven’t received a refund or been notified of an audit, you can fax your withdrawal request to the IRS using their special fax line. If faxing isn’t an option, mail your request. Be aware that mailing will result in slower processing.
- Under Audit?: If you’ve been notified that your claim is under audit, you should send your withdrawal request directly to the assigned examiner, or respond to the audit notice if no examiner has been assigned.
- Received a Refund Check?: If you have the refund check but haven’t cashed or deposited it, mail the voided check along with your withdrawal request using the instructions at gov/withdrawmyerc.
Avoiding Penalties and Interest
By withdrawing your claim, you can prevent future repayment demands, interest, and penalties. Essentially, the claim is treated as if it was never filed. It’s crucial to note, however, that this does not apply to fraudulent claims. If you willingly filed a false claim, withdrawal would not protect you from possible criminal prosecution.
Guidance for Those Who Received Payments
The IRS is also working on guidelines to assist employers who were misled into claiming the ERC and have already received the payment. The IRS anticipates that these details will be available this fall.
Navigating the ERC claims process can be daunting, especially amidst the backdrop of aggressive marketing and the risk of inaccurate filings. The IRS’s new withdrawal option provides a safety net for businesses that wish to avoid the pitfalls of a potentially erroneous claim. If you have any questions, or require assistance, please contact your Fraser Trebilcock attorney.
This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.
Robert D. Burgee is an attorney at Fraser Trebilcock with over a decade of experience counseling clients with a focus on corporate structures and compliance, licensing, contracts, regulatory compliance, mergers and acquisitions, and a host of other matters related to the operation of small and medium-sized businesses and non-profits. You can reach him at 517.377.0848 or at email@example.com.
Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or firstname.lastname@example.org.